Public finances expose weakness of Scottish economy

Nationalists’ ambitions rest on an independent Scotland overturning what they call “a historic gap in economic performance with the UK”. Although full levers to manage Scotland’s economy were not devolved to Holyrood in 1997, the Scottish government claims to have made progress in narrowing the gap.

Evidence for the claim that devolution has helped Scotland’s economy is thin on the ground, particularly since Alex Salmond became first minister in May 2007. But contrary evidence of a subpar Scottish performance is also lacking. Between the second quarter of 2007 and the first quarter of this year, both the UK as a whole and the Scottish economies grew exactly the same amount – a paltry 0.9 per cent.

Economists say this similar performance in the headline indicators for the UK and Scottish economies is replicated in most other areas. Both countries were derailed by the collapse in the banking sector, their subsequent rescue by the UK government and the consequent need for cuts in public spending.

The labour market has also shown similar trends, although there was a bigger swing up and down in Scotland. The unemployment rate started in 2007 in Scotland at 4.6 per cent and 5.5 per cent in England, and seven years later, it was almost identical at 6.4 per cent and 6.3 per cent respectively.

But behind the headlines, which indicate little unique in Scotland’s economic performance, Angus Armstrong, director of macroeconomic research at the National Institute of Economic and Social Research, said there were some underlying weaknesses in Scotland’s economy.

Stripping out the effects of North Sea oil, he said the estimates of the current account deficit – 7.5 per cent of Scotland’s economy – suggested the onshore economy retained significant weaknesses that had not improved since Mr Salmond became first minister. “These are big numbers,” Mr Armstrong said.

Professor Richard Harris of Durham University Business School produced a similar analysis of underlying weakness in Scotland’s productivity performance in the summer. While the output for every hour worked numbers were similar to the UK average, his estimates of total factor productivity – the efficiency by which an economy uses labour and capital – suggest a persistent 11 per cent gap with the rest of the UK since the 1990s.

Elsewhere, the similarities between England’s and Scotland’s social records in recent years again dwarf differences. David Bell and David Eiser of the University of Stirling found that income inequality in Scotland was lower than in the rest of the UK, “but only because of particularly high levels of inequality in London” and if anything had grown faster since 2007 north of the border.

It is only in the public finances where big differences in the headlines arise. Assuming a per capita share of oil revenues, Scotland’s budget deficit would have been 13.3 per cent of national income in 2013-14 compared with 7.3 per cent in the UK as a whole. If Scotland received a geographic share of the UK’s oil revenues, borrowing would still have been worse at 8.3 per cent of GDP with the prospects looking difficult unless there was an unexpected surge in North Sea revenues.

Despite troubling public finances, public spending cuts have not been as deep in Scotland than in the UK, the Institute for Fiscal Studies has calculated. “Scotland has had less austerity due to the madness of the Barnett formula”, Paul Johnson, director of the IFS said. Even with the ability to vary spending cuts, Mr Salmond’s Scottish government, “steered closer to English spending decisions than Wales”, he added.